The foreclosure process in the United States can be viewed as consisting of five phases:
- Sheriff’s sale
The focus of this article is the foreclosure phase. Foreclosure means that the mortgage lender will seek the aid of a court to obtain title to the loan collateral – the property – so that the lender can sell it to satisfy all or part of the loan. Thus, a judgment of foreclosure cuts off the homeowner’s right to sell the property or use it as collateral for other loans.
Buying Property: Foreclosure Listings
The procedure for initiating a formal foreclosure action differs from state to state. In some states, mortgage lenders, like other creditors, must file a notice of default in the county in which the property in question is situated. In other states, a document called a lis pendens must be filed in the home county. Both of these legal instruments are formal notice to the public of the default of the debtor and the intent of the creditor to sue to the debtor.
Investors can find out which properties are facing foreclosure through word of mouth, by searching the public records, reading public notices of default in the local newspaper, or subscribing to a service that provides foreclosure listings for a fee. However foreclosure properties are tracked down, it is crucial that investors maintain the attitude that the purchase of property from financially and emotionally distressed owners is nothing more than a business transaction.
Buy Before Judgment
Many homeowners seem to wake up to the fact that they are in financial distress only when the mortgage lender has put the matter in front of a court. While a foreclosure action is pending in court, the homeowner may realize that his or her only alternative is to sell the property to stop the proceedings. It is in the homeowner’s interest to do so because a foreclosure judgment remains part of the homeowner’s credit history for as long as 10 years. A sale is also in the lender’s interest because the lender will not have to move to the subsequent phases of foreclosure.
The foreclosure phase can be very good for the real estate investor. Like an over-matched boxer, the homeowner is pinned against the ropes, with little defense against the blows landed by the lender in the court action. The homeowner knows the fight is lost and that the bell will sound at any moment, with the lender declared the winner. If an investor makes an offer for the property, the homeowner will be highly motivated to accept it.
This is the time for an investor to demand a deep discount in the price of the property. However, if the amount offered by the investor is not enough to cover the mortgage loan balance, the lender is not obligated to accept the short sale, and the homeowner would have to find a source of funds for the shortfall. The deal may fall apart.
Keep Emotions at Bay
Investors must never feel an attachment to any property (“I just have to have this”) that they are considering buying. Foreclosure is frequently a very emotionally distressing situation for the homeowner. Nonetheless, investors must resist feeling an obligation to “help out” a homeowner by offering too much for a property.
Nor must investors neglect their due diligence by failing to ascertain the physical condition of the property (particularly costly items such as foundations, roofs, windows, and the plumbing, heating, and electrical systems) and the state of title (for example, whether other creditors have filed claims against the property). The pre-judgment period is the last chance to do so before the lender gains control of the property.